Pimco in Orange County Mandate Review

The Orange County Sanitation District staff thought it would be prudent to evaluate other options for cost and performance reasons. (Photo: Bloomberg)

A California state mandate to manage $430 million that’s been held by Pacific Investment Management Co. since 1995 is to be put out for bids in the open market for the first time.

The Orange County Sanitation District, which manages wastewater treatment and recycling in Pimco’s home county is to advertise a request for proposals for managing its investment program. It is also seeking an investment adviser to help with the process.

The agency will pay an adviser up to $40,000 to help in its selection process, according to public agency meeting documents. It voted to put the investment mandate on the market at an administrative meeting in late February and plans to select a consultant by the summer before conducting the tender for an investment manager.

Meeting documents said the district’s staff thought “it would be prudent to re-evaluate the availability of these services in today’s open market, from both a cost and a performance basis.”

Lorenzo Tyner, director of finance and administrative services, said the decision was not related to recent management changes at Pimco. Mr. Tyner said: “For professional services contracts like this, we ordinarily re‑tender them every so often and we hadn’t done that in a while on this one. With everything going on in the financial markets over the last five or so years, we thought it was a prudent thing to do.”

Pimco did not respond to requests for comment.

Pimco currently collects about $645,000 per year in fees from the $430 million Orange County Sanitation District portfolio, a drop in the ocean of the fund manager’s total revenues, which rose 5.1% year-on-year to €5.63 billion ($7.83 billion) in 2013. But the district’s move to re-tender the investment mandate hits close to home for the fund manager and comes at a delicate time for the firm, which announced the departure of chief executive Mohammed El-Erian in January.

After Mr. El-Erian’s departure, Pimco re‑shuffled its senior staff, appointing a new chief executive and naming six deputy chief investment officers, but was put on watch lists by several large pension funds as a result of the changes.

The City of Phoenix Employees’ Deferred Compensation Board last month decided to put Pimco’s Total Return fund and All Asset fund on its watch list, citing the changes. Meanwhile, the Vermont Pension Investment Committee also put the fund manager on its watch list, according to public January meeting documents.

Pimco, which is owned by German insurer Allianz, suffered net outflows of €20 billion last year as investor fears over the impact of the Federal Reserve’s tapering actions led them to pull money from bond funds.

Adding to headaches for the firm is performance at some of its largest funds. Institutional shares at the firm’s flagship total return fund lost 1.92% last year and have suffered net outflows of $5.1 billion year to date, according to Morningstar. The firm’s unconstrained bond fund lost 2.6% last year and has suffered net outflows of $1.54 billion so far this year.

At the end of last year a Vanguard fund replaced the Total Return fund as the largest mutual fund in the world.